Answer to Question #216015 in Economics for Palwikhan

Question

Give at least 10 explanations for why firms might find it profitable to pay wages above the level that balances the quantity of labor supplied and quantity of labor demanded?

Answer 1

Minimum wage laws. The first reason is the use of minimum wage laws. For some low-skilled workers, minimum wage laws raise earnings above a level that would match their income in the absence of minimum wage laws.

Influence of trade unions. The second reason for wages exceeding the equilibrium level is the presence of power over the labor market in trade unions. A union is an association of employees that negotiates with employers about wage levels and working conditions. Unions can push wages above the equilibrium level because they can paralyze the firm by organizing a strike.

The theory of effective wages. The third reason is explained with the help of the theory of effective wages: it may be beneficial for a firm to pay high wages, as it increases the productivity of its employees. In particular, high wages help reduce staff turnover, increase employee diligence, and attract more qualified professionals. Therefore, in some firms, workers' wages may exceed the normal average.

Wages exceeding the equilibrium level, whatever the factors may cause, have the same effect on the labor market. An increase in wages relative to the equilibrium level increases the supply of labor and reduces the demand for it. The result is a surplus of labor - unemployment.